July 2013 Questions & Answers

 

 


R Wrote: I'm a HUGE fan! I watch your shows while I update MoneyDance with my husband every week. I have a question about a large lump-sum we're expecting from our tax return:

My husband and I contributed a lot to our RRSPs this year as tax planning because we were planning to buy a house so we put our down payment into an RRSP at the beginning of the year and then withdrew it as part of the first-time home buyers plan. Because of this, and the monthly RRSP contributions we currently make, and my husbands remaining tuition credits, we are expecting about $10,000 back in a tax refund.

Our plan when we bought our house was to pay the mortgage off as fast as possible, so we currently pay an extra $140 per bi-weekly payment towards the mortgage, and we are planning to use some of our tax return as a lump-sum payment towards our mortgage principle. BUT, I also want to get our savings/emergency fund back up to where it was before we bought our house. Our savings currently sit at $3000 and another $3000 in an emergency fund, plus another $1000 balance in each chequeing account. We have $0 debt except the mortgage (we own our car outright). We spend about 35% of our income on housing, taxes, utilities, including putting 1% of our homes value into a savings account each month. We save about 20% of our income on savings/retirement.

Our plan for the tax return is to spend $4000 on a vacation, buy a much needed new fridge ($1000) and then contribute the remaining $5000 to our mortgage. But now I'm starting to think we should put less towards the mortgage and put some additional funds into the emergency account. My goal for the emergency savings is $10,000, which we are on track to reach by the end of this year without the top-up.

What do you think? Should we split the $5000 towards the mortgage and savings?

Gail Says: I'd boost the emergency fund before paying down the mortgage. That cash in the bank is what will keep everything else on track if life throws you a curveball. The objective is to have six months' worth of essential expenses. I'm glad to see you're so focused and still balanced. Well done!

 

R Wrote: I am an avid viewer of your show and have read several of your books. I am 25 years old, married and have one young child. We have no consumer debt and I have never had any debt (except Mortgage and car payment). We do not use internet banking and do not have a debit card. We have one convenience card that we have never carried a balance on. We receive all of our bills through the mail and pay them at the bank. We do not pay any service fees due to the balance we maintain. We have a comfortable income and are comfortably situated.

Several of our bills have come in this month and have a new $2 paper billing charge on them (we were never notified that this was going to occur). My question is what is the best thing to do about the new $2 paper billing charge?

Gail Says: This is an attempt to push consumers to paperless billing. I'd suggest you call each company and raise hell. Insist the charge be taken off. If you don't get any joy you may have to join the 21st century, set up internet banking and receive your bills online.

 

M Wrote: Hi Gail! I came to meet you in Winnipeg, but the lines were WAY too long. I gave up after an hour when I was still outside the store. It speaks to how many people you've inspired. Hopefully you'll come again :)

Okay, question time...I'm 25, owe 25k in student debt LOC @ 5.5%, and have approximately 5k saved for retirement and 10k in a TFSA which I consider an emergency fund. Now that I have set up my emergency fund, I think I should start taking the $400 a month that I was putting into my TFSA for the past 2 years and apply it somewhere else. The problem is that I feel like I am inundated with information on retirement, saving, money management, and debt repayment. Should I be putting the $400 extra a month into my RSPs to get a bigger tax break and benefit from the compound interest that every money blogger raves about, or should I put it towards my 25k debt so that it is paid off sooner? The 'Gail' in my head says to bust out a calculator and figure out whether the savings in interest would be greater than the amount made on my taxes/compound interest, but I suck at this kind of math. Help?

Gail Says: It's more than just the math, it's also about balance. How about you take $300 of that $400 and use that to pay down your student loan faster, and contribute that $100 every month to your retirement savings. You get to pick the actual numbers, but don't stop being a 'saver'... it's a mind-set and one you should keep.

 

M Wrote: We have a child with Special Needs. We have been contributing to his RESP since birth (he is now 4 years old). We are starting to wonder if this is the best use of our resources? Our concern is that he may need more financial support in the future and would like to save what we can to provide assistance in the future.

We also have a savings account for him (through birthdays and Christmas) that we intend to keep for him until he is older (close to $2500 at this point). What would you suggest?

Gail Says: Your child might qualify for the RDSP. Read more here: http://gailvazoxlade.com/blog/archives/338

 

T Wrote: First, thanks for all the great advice over the years. When I first came across you TV show I was in debt hell and had no savings. Five years later, I am debt-free and have more savings that I ever would have thought possible.

I am currently struggling with the need vs want on the "clothing" expense category for myself. I work for a not-for-profit with no dress code so I just wear what is comfortable but I am getting to a point in my career where this won't continue to fly and I hate shopping. I resent spending $ in this category.

Perhaps you have some sensible guidelines that you use or could suggest.

Gail Says: I suggest you spend some time figuring out what pieces you'll need to build a "work wardrobe." There are standard pieces that when combined go a really long way so you don't have to spend tons of money and by accessorizing you change up the looks. These two guest blogs by stylist Afiya Francisco might help: http://gailvazoxlade.com/blog/archives/2525 and http://gailvazoxlade.com/blog/archives/2528 or you could look for similar articles using Google. Plan ahead, price the pieces out, and then check them off as you build your foundation wardrobe. Make it a project so you see the point in spending the money.

 

T Wrote: What are the ramifications of borrowing money from a cash-value life insurance policy? The intention would be to pay down debt. My husband has a cash-value policy however we also have mortgage insurance and we are both fairly well insured through our employers; I believe he is insured for 2 x his salary which is approximately $94, 000 annually - which would pay $188, 000 in the event of death.

We have a line of credit we would like to pay off, and my father in law has told us that his financial advisor told him that while the withdrawal against a cash-value policy is still treated as a loan with interest you essentially never have to pay it back, but that the monies you pay monthly are used to cover the interest on the "loan". We have also been told that we would be guaranteed a $60, 000 pay-out of the policy, plus any cash value, and that any borrowing done would not affect the $60, 000.

Does this seem like legitimate information to you? We are paying $98.00 monthly towards the policy, and likely will forever so if the cash is available to us we would like to utilize it to pay off debt, but not if the penalty is too great.

Gail Says: Without seeing your insurance contract there's no way for me to know if the $60K guarantee is legitimate. Have you read the contract? I know people loathe going through the fine print, but that's the only way to know what's what.

 

J Wrote: I am a 57-year-old woman who is late getting started on saving for retirement. I have very little saved ($5,000) but will be putting as much as I possibly can into savings for retirement for the next 8 years (my goal is to have $100,000 saved by my 65th). My question is: registered versus non-registered.

I have researched my government retirement income -- CPP, OAS and Supplement. It appears to me that if I have no, or few, other types of income, I will quality for both OAS and the Supplement. However, if I do have other forms of income, the Supplement and even OAS may be reduced or even deleted.

There must be a threshold where it doesn't make sense to contribute to an RRSP if withdrawals from the RRSP will put me over that OAS/Supplement threshold.

I hate the thought of giving up freebies from the government in retirement (Supplement) due to bad planning, but at the same time I could be reinvesting my tax refund if I do contribute to an RRSP.

Gail Says: In your situation, the Tax Free Savings Account is a better option than an RRSP.

 

C Wrote: If you take your CPP at age 65 but continue working fulltime for the same employer, can you continue to contribute to your group RRSP? PS -- Listened to you today on Ontario Today (CBC) terrific as usual - immediately ordered the new book to add to my collection. You make so much sense; I only wish I had taken your advice 20 years ago...but as they say, better late than never.

Gail Says: Why would you take your CPP benefits if you're still earning an income? Since CPP is taxable, you'll lose a significant portion of those benefits back to taxes.

As for as the RRSP is concerned, you can contribute to an RRSP up to the end of the year in which you turn 71 as long as you have earned income in the previous year.

 

C Wrote: I am enjoying your book Money Rules. My question for you is, we have sold our home and are buying a new one. After making the minimum 5% down payment we are wondering if we should take the equity that we will have from our sale and invest it in RRSP's, GIC's, TFSA or ???

We have two vehicle payments that are covered by a car allowance. We have no other commercial debt.

Gail Says: Why are you only putting 5% down when you clearly have more money available? You should be aiming to put as much down on your home as you can. 20% is the amount you need to avoid having to pay CMHC insurance on your mortgage. That's where you should be aiming.

 

J Wrote: My company has a plan where they will deduct any amount I request, and they show the deduction on my stub, they put the money in an account, and at the end of the year, they will give me a cheque for the total amount deducted plus 10%. Does this sound like a good idea? I have never heard of a benefit that works that way, seems sketchy. I am reading your Money Rules book and just trying to tap into any free money I can get, what do you think?

Gail Says: It sounds like a savings matching program but I've never seen one not in a pension arena so I don't know what to tell you. Is there any documentation for this program? I suggest you ask how the money is being "protected" so that if the company goes south your money is still YOUR money.